The Chief Investment Officer of JP Morgan Comes Out of the Peak Oil Closet

At the heart of the cornucopian view of energy abundance lies the belief that technology will overcome any natural resource constraint. The poster child for this view of the world is Moore’s Law, whereby computing power follows the allegory of a grain of wheat on a chess board (so promising untold riches for us all). Interestingly, Michael Cembalest the CIO of JP Morgan—surely the antithesis of The Archdruid—displayed a large dose of scepticism over this technological nirvana in a recent report that commenced by highlighting a few famous predictions of our energy future (in so doing, Cembalest makes the point that Moore’s Law is the technological exception—not the rule):

• 1945. Oak Ridge National Laboratory nuclear physicists Weinberg and Soodak predict that nuclear breeders will be man’s ultimate energy source; a decade later, the chairman of the US Atomic Energy Commission predict it would be “too cheap to meter”

• 1973. “Let this be our national goal: At the end of this decade, in the year 1980, the United States will not be dependent on any other country for the energy we need to provide our jobs, to heat our homes, and to keep our transportation moving.” Richard Nixon

• 1978. “Through modeling of supply and demand for over 200 US utilities it was projected that, by the year 2000, almost 60% of US cars could be electrified, and that only 17% of the recharging power would come from petroleum.”

• 1979. An influential Harvard Business School study projects that by 2000, the US could satisfy 20% of its energy needs through solar

• 1980. Physicist Bent Sorenson predicts that 49% of America’s energy could come from renewable sources by the year 2005

• 1995. Energy consultant and physicist Alfred Cavallo projects that wind could have a capacity factor of 60%, which when combined with compressed air storage, would rise to 70 – 95%

• 1999. US Department of Energy hopes to sequester 1 billion tonnes of carbon per year by 2025

• 2000. Fuel cell companies announce 250-kilowatt production plants that can fit into a conference room and produce energy at 10 centsper kilowatt hour, with the goal of 6 cents by 2003

• 2008. “Today I challenge our nation to commit to producing 100% of our electricity from renewable energy and truly clean carbon-freesources within 10 years. This goal is achievable, affordable and transformative.” Al Gore

His somewhat acid summary as to ‘how have things turned out’ goes as follows:

There are no commercial nuclear breeders on anyone’s horizon; global nuclear capacity is only 20% of the Atomic Energy Agency’s 1970 forecast; the Hypercar is nowhere to be seen; solar and wind make up a miniscule portion of US electricity generation; wind capacity factors range from 20%-30%; the US is reliant for 50% of its oil from foreign sources; 70% of US electricity generation comes from coal and natural gas; fuel cells haven’t worked as expected; hybrids are 2% of US car sales; “clean coal” is mostly a blueprint; and Venter announced that his team failed to find naturally occurring algae that can be converted into commercial-scale biofuel (they will now work with synthetic strains instead).

Cembalest draws the obvious conclusion:

From a broader perspective, the era of cheap oil appears to be over. As shown below in the first chart, almost the entire future increase in oil supplies projected by the EIA are based on unconventional supplies (tar sands, deep-sea drilling, enhanced oil recovery, oil shale, etc.), with the word “unconventional” being shorthand for “more expensive”.

Rewind to the famous Peak Oil article by Colin Campbell and Jean Laherrere in a 1998 edition of Scientific America that I highlighted in a previous post here. These were the words that Campbell and Laherrere finished their article with:

The world is not running out of oil— at least not yet. What our society does face, and soon, is the end of the abundant and cheap oil on which all industrial nations depend.

The difference is minimal. I noted in a previous post that ‘Peak Oil’ was no longer viewed as a province of cranks. As yet though, it remains the preserve of a relatively small band of advocates, while a few enlightened elites, such as Cembalest at JP Morgan and the head of the International Energy Agency Dr Fatih Birol, are starting to see the disappearance of cheap oil (the best definition of Peak Oil) as a legitimate risk .

For the wider global poplutation, individual narratives have been built on increasing energy availability—and politician have just reflected this perception. The idealised American Dream is as much one of energy abundance as political freedom; but while one may remain free to own an automobile, can one afford the gasoline to drive it?

Faced with this conundrum, the majority of the population faces a problem of cognitive dissonance: to admit that energy could constrain both growth and living standards is to admit that the stories we tell of how our lives, and the lives of our children, will unfold are not true. The common psychological reaction is to ignore the counterfactual. Thus if oil remains above $100 a barrel, or even heads higher, the pre-programmed response is to assume that the shock is temporary and, as such, irrelevant.

A recent article in the Telegraph on the economic slump in Ireland provides an illustration of this reaction: a perceived reality was believed to be the only true one (of rising house prices)—until it was impossible to maintain this fiction any longer. Cognitive dissonance ultimately translated into ruined lives.

True, we cannot equate oil equally with energy, but by increasing the cost of oil radically (which makes up 33% of the globe’s total energy demand), we do change the aggregate energy outlook. And energy is not fungible: oil energy is dense, electricity stored in a battery is not. One is not a perfect substitute for the other. We also don’t know the timing nor severity of any likely oil shock. If it comes slow and late, the global economy may have the resilience to absorb it. If a supply shortfall comes quick and soon, it will be very difficult for the global economy to respond without a new recession or worse.

To give credit to Cembalest of JP Morgan, he demonstrates that ‘this time is different’. If the shock comes fast and early, I am not sure he quite realises how different it will be.